Direct Tax Code 2010
Recently, to be precise on 12th of August 2009, Union Finance Minister tabled the comprehensive discussion paper and draft of New Direct Tax Code 2009, in the parliament and ever sincere there is a lot of debate, discussions about the same. Let us see what is in it for the common man.
Basically, the government wants to overhaul the 48-year-old Income Tax Act by opting for a single code for direct taxes. The code, which the government proposes to enact and implement from the financial year 2012, of course with changes if required, envisages a meaningful reduction in the tax rates at the same time being revenue neutral for the government. It aims to achieve this by increasing the tax base and rationalising the myriad tax incentives prevalent under the current law.
The Tax code proposes a significant increase in the tax slabs for personal income tax which will be a big change to four-decade old Income Tax Act, 1961. As per the proposal, the new tax slab would be as below:
|new proposed tax slabs for individuals|
|tax rate||existing income slab (rs)||proposed income slab (rs)|
|nil||upto 1,60,000||upto 1,60,000|
|10%||1,60,01 - 3,00,000||1,60,01 - 10,00,000|
|20%||3,01,001 - 5,00,000||10,00,001 - 25,00,000|
|30%||over 5,00,000||over 25,00,000|
|* minimum slab changes to rs. 1.9 lakh for women and 2.4 lakh for senior citizens.|
Let us take an example of a salaried person and see how it works?
Name : Ajit Gaunekar
Salary : 8,00,000 per year
Investments: Investment of 30,000 in Mutual Funds
30,000 in EPF
20,000 in PPF
20,000 in Insurance Policy .
Home Loan: Taken a Home loan and pays 80,000 as Principle and 1,40,000 as Interest .
Tax as per Current System:
Amount Exempted = 1,40,000 as home loan interest + 1,00,000 in 80C = 2,40,000
Taxable Income = 5,60,000
Tax = 14,000 (10% from 1,60,000 to 3,00,000 )
40,000 (20% from 3,00,000 – 5,00,000) +
18,000 (30% on 5,00,000 – 5,60,000)
Total= Rs 72,000
Tax as per New Tax Code:
Amount Exempted = 1,00,000 from (mutual funds , PPF , EPF , Insurance)
+ 80,000 as Home loan principle
Taxable Income = 6,20,000
Tax = Rs 44,000 (10% on 1,60,000 - 6,20,000)
So, there is a savings of Rs.28,000/- (Please note that this is only to demonstrate)
Treatment of Capital Gains:
The code proposes scrap the distinction between long and short-term capital gains and abolish the Securities Transaction Tax (STT), meaning which taxing all capital gains at the applicable marginal tax rate for the tax-payers’ total income. At present, the tax on long-term capital gains is Nil on equity transactions on which STT is paid and 20% on all other assets, while the short-term capital gains tax rate is 10% on equity transactions on which STT is paid and 30% on other assets. In my view, the proposed increase in tax slabs is quite substantial in view of the country’s per capita income distribution, and should reduce the impact of the proposed increase in capital gains tax rates.
Tax Incentive for Savings:
The code also proposes to increase the tax deduction limit available on savings from Rs1lakh at present to Rs3lakh under section 80 C. But on a negative note, the code also proposes to tax the savings in various instruments including PPF, Insurance, etc. at the time of withdrawal, i.e. investments in tax savings instruments will only lead to a postponement of tax liability rather than an outright exemption as applicable at present. Moreover, retirement benefits such as gratuity will be tax-free only if deposited in specified retirement benefit schemes. As per the proposal , the amount accrued till 2011 will be non-taxable , this will be applicable to all the proceedings after 2011 only.
Interest paid on Housing Loans:
The tax incentives on Interest paid on home loans is proposed to be withdrawn. Removing tax breaks for home loans would bring down housing prices, as it is the simple concept of demand and supply. Today, people select a house based on the (EMI – tax break) they can afford. When tax break is no more, they will select a house based on the EMI they can afford. This brings down the demand price. Though, the absolute amount of money in the hands of consumers is higher because of lower tax rates so real estate prices may not come down in absolute terms. But relative affordability of houses as compared to, say, cars/stocks/clothes/food/travel will increase because there is no tax deduction just for paying interest on a home loan.
Perks as a part of the income:
The perks offered by the employer such as interest free loan, rent-free accommodation, medical reimbursements, leave travel concessions, free lunch etc. will get added to the individuals income and taxed.
Is New Tax Code Good or Bad?
This is an interesting question , I will posit this tax code as a good one , the biggest thing to observe in the New Tax Code is that the tax slab is just 10% for income from 1,60,000 to 10,00,000. There are many changes in the new tax code which may look bad and hurting, but at the end individuals will gain from it , because the tax charged will be just 10% , So the taxable salary will go up because of some changes but yet tax liability will actually reduce. Many people’s doubt is that over long term if my maturity amount from mutual funds , insurance policies and PPF will become taxable , then yes that true , but now one will save more to invest . So even if we assume 20% tax charged at the time of maturity, we need to invest 25% more than what we usually do to gain, which will happen I believe so.
Please note that this is an analysis if new proposal comes into effect. As of now it is just a proposal , don’t panic, lot of debates and discussion will happen and the final hearing would take place after the bill being placed in the parliament during winter session of 2009 and this can take totally new direction or may be it does not happen at all and we continue with current tax system.